Often, when people think of “estate planning” they think it’s a task only for what happens after death. While an estate plan certainly deals with the distribution of assets at death, it also is about preparing for the complexities of life.
The first article in the series showed how an estate plan prepares one for incapacity during life and not just for the distribution of assets at death. This article will focus on how an estate plan should take into consideration the potential for future Long-Term Care (“LTC”) needs.
LTC expenses are an ever-increasing concern. The cost of care continues to rise. According to a recent survey by Genworth, the national median cost of nursing home care is over $85,000 per year for just a semi-private room. You can click on the link to find the cost of care in your state and the costs of other types of care, such as an Assisted Living Facility.
How will these LTC costs be paid?
The vast majority of people age 65 and over have Medicare which pays most of their medical expenses, albeit with some copays. So, most people think Medicare would foot the bill for LTC expenses, or at least most of it. But, Medicare only pays under limited circumstances and only up to a few months maximum. Medicaid is an option, but it requires that the applicant must be needy, both medically and financially. Typically, the applicant can have no more than $2,000 in countable resources, such as savings and investments. Some resources, such as the applicant’s primary residence (up to at least $572,000 (in 2018) in equity) are not countable. Transfers within a 5-year lookback period cause a severe penalty. (The rules in California are a little different, for example the lookback period is shorter.)
You can plan in a few ways. You can buy a LTC insurance policy. However, the options in the LTC insurance market have been dwindling in recent years and the prices have been rising sharply. Another option is to save enough money to pay for your own LTC expenses out-of-pocket. With the median cost over $85,000 per year, that would add a great deal to the amount which you would need to save for retirement. The other option is to structure your estate plan to qualify for Medicaid in the future.
You can structure your estate plan to qualify for Medicaid in a couple ways. You could gift assets into a specialized trust which could be available for your adult children and could even pay you income. However, you could have no access to the principal in the trust. As long as you transferred assets more than five years before you need LTC, the transfer would not generate a penalty and the assets in that specialized trust would not be considered “available” resources.
If you’re not ready to transfer assets now, at a minimum, make sure your estate plan includes the flexibility in your documents to allow for your trustee of your trust and your agent under your financial power of attorney to do the planning required to qualify you for Medicaid. That way, if you become incapacitated, your family can still do planning to qualify you for Medicaid when the need is more immediate.
For example, let’s say you have a house worth $500,000 with a $300,000 mortgage. You have $352,000 in investments and cash. You wouldn’t qualify for Medicaid because you have $352,000 of “available” resources and the limit is $2,000. However, if your estate plan has the flexibility, your trustee and agent can use the investments and cash to pay off your mortgage with $300,000 of the investments. They could use $26,000 to make repairs and accessibility adaptations to your home. Finally, they could buy a car with another $24,000 to use for your medical transportation. That would leave $2,000 “available,” which is within the limit. At that point, you’d qualify financially for Medicaid. If your estate plan did not have the flexibility to do the planning for Medicaid, you wouldn’t qualify for Medicaid or your family would need to go to court to get the ability to do the planning.
LTC expenses are something each of us must consider in our estate and retirement planning. Make sure your estate plan takes the potential for future LTC expenses into consideration.
Stephen C. Hartnett, J.D., LL.M.
Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128